MICROCHIP TECHNOLOGY INC Q2 FY2025 earnings call

Eric Bjornholt provided Q2 financial results: net sales were $1.164 billion, down 6.2% sequentially. Non-GAAP gross margin was 59.5%, operating margin 29.3%, non-GAAP net income $250.2 million, and EPS $0.46. Rich Simoncic highlighted product line innovations, including the dsPIC33A Digital Signal Controller in Microcontrollers, PCIe switches in Data Center and Networking, and Single-Pair Ethernet in Automotive. Ganesh Moorthy discussed the business environment, noting inventory destocking, macroeconomic weakness, strength in aerospace/defense and AI data center, and the capital return strategy, including returning $261 million to shareholders in Q2.

In the Microcontroller space, the new dsPIC33A Digital Signal Controller core with 32-bit architecture and double precision floating point unit is driving innovation in industrial automation, clean energy, and data centers. In Data Center and Networking, PCIe switches and high-performance PCIe SSD controllers are in mass production, with CXL controller solutions seeing increased qualification activity. In Automotive, the Single-Pair Ethernet portfolio and VelocityDRIVE software platform are expanding, supporting next-generation software-defined vehicles and industrial applications.

Microchip provided guidance for the December quarter: net sales expected to be between $1.025 billion and $1.095 billion. Non-GAAP gross margin is expected to be between 57% and 59% of sales. Non-GAAP operating expenses are expected to be between 33.2% and 34.8% of sales. Non-GAAP operating profit is expected to be between 22.2% and 25.8% of sales. Non-GAAP diluted earnings per share is expected to be between $0.25 and $0.35.

Microchip discussed several risks, including a cybersecurity incident that impacted business operations with a total cost impact of approximately $21.4 million. Inventory management poses challenges with 247 days of inventory at the end of Q2, and macro-economic uncertainties such as weak manufacturing demand, high interest rates, and uncertain business outlook continue to affect customer purchasing plans.

Q: Timothy Arcuri from UBS asked about the distribution channel and inventory days.

A: Ganesh Moorthy responded that distribution inventory is destocking but visibility is low, and inventory days are calculated on a backward-looking basis.

Q: Vivek Arya from Bank of America Securities asked about near-term turns business and March sales.

A: Ganesh Moorthy and Eric Bjornholt discussed challenges in predicting March sales and the impact of turns business on December quarter.

Q: Toshiya Hari from Goldman Sachs asked about the gap between sales and consumption and pricing.

A: Ganesh Moorthy and Eric Bjornholt addressed the bullwhip effect and pricing pressure.

Q: Chris Caso from Wolfe Research asked about geography impact and borrowing.

A: Ganesh Moorthy and Eric Bjornholt discussed Europe's industrial/automotive exposure and borrowing for dividend payments.

Q: Blayne Curtis from Jefferies asked about product innovation and OpEx.

A: Ganesh Moorthy and Eric Bjornholt talked about data center product growth and OpEx adjustments.

Q: Christopher Rolland from Susquehanna International Group asked about data center products and CapEx.

A: Ganesh Moorthy and Eric Bjornholt discussed data center growth potential and low CapEx expectations.

Q: Harlan Sur from JPMorgan asked about TSS success.

A: Ganesh Moorthy and Richard Simoncic mentioned TSS tracking through reference designs.

Q: Tore Svanberg from Stifel asked about CapEx and revenue growth.

A: Eric Bjornholt discussed CapEx and capacity to grow revenue.

Q: William Stein from Truist Securities asked about green shoots and sales decline.

A: Ganesh Moorthy and Eric Bjornholt addressed green shoots and sales decline reasons.

Q: Chris Danely from Citi asked about inventory write downs and sales decline vs peers.

A: Eric Bjornholt and Ganesh Moorthy responded on no inventory write down concerns and sales decline reasons.

Q: Joshua Buchalter from TD Cowen asked about gross margin and channel partners.

A: Eric Bjornholt and Ganesh Moorthy discussed gross margin expectations and channel partner importance.

Q: Harsh Kumar from Piper Sandler asked about pricing and green shoots.

A: Ganesh Moorthy discussed pricing pressure and green shoot status.

Q: Janet Ramkissoon from Quadra Capital asked about CHIPS Act.

A: Ganesh Moorthy and Richard Simoncic discussed CHIPS Act progress and equipment deployment.